The first, immediately below, shows the progress of bidding in
the 2016 auction. In simple terms:

the process starts with all prequalified potential providers of
capacity "in" at the cap price of £75/kw/year and
the price then goes down by £5 with each round;

the auction clears when the purple line, whose progress from
right to left shows how many bidders are left in after each round,
converges with the red line "demand curve" drawn on the
graph by the Government as part of the auction parameters;

all bidders still in at that point get a capacity agreement at
the clearing price.

The big right to left moves occurred when the price moved
between £35 and £30 and below £25. In
particular, each of these moves saw 6GW of capacity drop out.

It's only an educated guess, of course, but it seems likely
that much of the big leftward shifts in both auctions represented
the exiting of bidders with plans to build large-scale proposed
combined cycle gas turbine (CCGT) plants. As a group, they
are almost certain to have higher per MW development costs than
other categories of new build projects competing for capacity
agreements (small gas or diesel projects based on reciprocating
engines, open-cycle gas projects, or battery based storage).
And the amount of capacity involved corresponds roughly with the
big CCGT projects in the auction.

If the above is correct, why where proposed new big CCGT plants
apparently prepared to tolerate prices almost 50% lower this
year? Perhaps they were hoping that a price between £30
and £35 would be where the auction cleared this time, on the
basis that:

the clearing price is effectively set by the bidding behaviour
of a sub-set of the smaller-scale, distribution-connected, fossil
fuel generators;

on top of their power sales revenue, these smaller-scale
generators have two main projected sources of income: capacity
agreements and so-called residual demand TNUoS benefits;

the anticipated loss in residual demand TNUoS benefit revenue
would be enough to push the smaller-scale generators to want a
significantly higher capacity market price than the clearing prices
seen in 2014 and 2015, both of which were below £20;

lower gas prices and slightly higher projected wholesale power
prices may make a low capacity market price more bearable for CCGT
plant, and there may other ways to mitigate merchant risk through
innovative trading arrangements.

Maybe Ofgem's warning wasn't strong enough. Maybe
the smaller-scale generators reckon that Ofgem's bark will turn
out to have been worse than its bite on this. In any event,
the outcome has shown that for now, simply expanding the amount of
capacity to be procured under an auction, as the Government
appeared to be hoping when it adopted a limited change of approach to the 2016
auction, isn't enough to ensure that some new GB CCGT plant
is financeable and gets built. Instead, a somewhat higher
price will be paid to all successful bidders, including existing
plant, for a larger amount of capacity than the Government thought
we really needed.

As usual on these occasions, the Government has professed itself happy with the result of the
auction, and it is fair to note that of the two new gas-fired
plants with a capacity of around 300 MW that have been successful
in the auction, one is described in the Capacity Market register as
being CCGT. But if a new generation of big CCGT plants is an
important part of our new lower carbon power mix, there is some way
to go. A possibly more promising approach to using a capacity
market to stimulate new CCGT build is suggested by the European Commission's recent Winter Package of
Energy Union proposals: set a date beyond which existing
coal-fired plant will be ineligible for capacity market
payments. This is not among the options canvassed in the Government's recent consultation on achieving
the closure of coal-fired plant by 2025. There would of
course be an element of risk in adopting such an approach (coal
plant might stay open because it can still make money without a
subsidy, resulting in overcapacity, or alternatively coal plant
might close immediately, before the new CCGT plant is built,
leaving a generation gap), but it might be worth considering.

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